Insukindro Insukindro(1*)

(1) Universitas Gadjah Mada
(*) Corresponding Author


For the last two decades, one of the major development in dynamic
specifications has been an error correction model (ECM). The ECM can be motivated
by optimizing behavior of economic agents in the presence of disequilibrium in the
economy. In this case, the agents need to optimize subjet to a separate disequilibrium
and adjustment costs. The disequilibrium cost is the cost associated with being out of
long run equilibrium, whereas the adjustment cost is the cost associated with changes
in the variables in question.
This approach can not only capture the short- and long-run specifications and
provide an attractive statistical framework, but is also consistent with the concept of
cointegration or equilibrium relationships in economic time series. It has also been
widely used to model the dynamic specifications in economic analysis, because it has
a number of advantages both in terms of its value in generating estimated regression
equations with desirable statistical properties and in term of the ease with which such
equations can be interpreted.


Error Correction Model, disequilibrium and adjustment costs, dynamic specification and disequilibrium error.

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